Wednesday, October 28, 2009

This year's Nobel prize for economics was awarded to 2 economist's looking at hitherto under-explored questions in economics- Williamson won it for his work illuminating the conditions under which it is efficient to organize economic activity in the form of a firm (extending the work first done by Ronald Coase) - while Elinor Olstrom was distinctive in her exploration of the mechanisms by which spontaneous bottom up order could solve complex economic problems (such as the "tragedy of the commons") without central fiat by the state, by creating self enforcing rules and free institutions.

Williamson's work is particularly intriguing.An exploration of the way the economy functions shows that its most obvious feature is that people organize themselves into firms. However, the focus of economic theory has largely been on the actions of self-interested individuals and their interactions in the free market.

One of the big shifts in modern economic thinking is to see evolutionary biology as a better analogue to understand the economy as compared to physics (which is where economics borrowed most of its conceptual frameworks from, including the notion of an "equilibrium" et al).

( As an aside "The Origin of wealth" by Eric Beinhocker is a fantastic book to understand how the economy can be best understood with biology rather than physics as an analogue; what he terms as "complexity economics")

To bring out some aspects of the analogy- individuals in an economy work to maximize their own utility (or self-interest). Analogously, genes, in evolutionary biology work to maximize their own interest (i.e. survival)

The fascinating thing is, just as under most circumstances, it is optimal for the "selfish gene" (to use biologist Richard Dawkins evocative term) to organize itself into, well, an organism to ensure its survival (i.e. maximize its selfish interest)- it is also in the interest of utility maximizing individuals to organize themselves into firms to carry on economic activity.

The interesting contrast is that both fields made opposite mistakes historically. Economics got the unit of analysis right- i.e. individuals, but paid scant attention to the emergent phenomenon i.e. the firm. In biology, the emergent phenomenon was well understood (i.e. the study of living organisms), but they got the fundamental unit of analysis wrong (by trying to understand how actions of an organism are in its interest, while the right question to understand was how actions of an organism were in the gene's interest)

Evolutionary biology, has of course now embraced the notion of gene-centered analysis while studying organisms. Post the Williamson award, one would expect economics to pay far more attention to the study of firms, while being rooted in analysis of individual utility maximization

As a history enthusiast, one of my favorite techniques in historiography is the use of counterfactual history. Counterfactual history posits and answers "What if" questions. (See the link http://en.wikipedia.org/wiki/Counterfactual_history for an overview)

As a technique, it is a good forcing mechanism to think through and assign the relative importance of a particular event to influence the course of actual history.

An interesting counterfactual that was posed recently was by the Indian historian Ramachandra Guha. Writing in the Telegraph, he posed a the intriguing question- What if Netaji had returned home to India after WW2- how would the course of Indian history been different?

Extending the counterfactual- I surmise the following about the policy direction that India would have evolved towards:

Economy: More free market capitalism with an emphasis on wage goods, as compared to planned State directed economy

Foreign policy: Less "internationalist" and more pragmatic & militarist

Social fabric: Continued to be secular, with social welfarist measures targeting disadvantaged groups

Governance structure: More unitary system- with no linguistic states

Political system: A weak and faltering democracy

Some of these seem very counterintuitive, but my argument is as follows:

I feel that a viable leftist alternative to Nehru, would have reduced his own influence within the Congress, pushing it to a slightly right of center party. We forget that unlike its modern avatar- the Congress (I), the INC at the time of independence was a party with vigorous internal debate and multiple points of view. Nehru was undoubtedly the most popular leader, but it was because he was unchallenged as a vote getter, that he was able to shape the Congress into a leftist party with little resistance. With a charismatic Netaji as an opposition force, it would have been far more difficult for Nehru to completely takeover the Congress policy agenda. Right leaning leaders such as P.D. Tandon and Rajaji, would have carried more weight than they did. Also, right leaning Congressmen and the royal classes who left the Congress to form the Swatantra party, would have continued within, due to the real threat of a complete socialist takeover by Subhas Bose, creating further pressure for the Congress to be right of center. This would have led to a Congress party that is more private sector and free-market friendly. This coupled with the likely militarist posture of Bose given his INA-background, would have also probably led to a foreign policy that was more "pragmatic" and "nationalist" than "internationalist" ( as any move to be dovish would have been easily allowed Bose to present himself as a strong, decisive military leader, particularly after the China war).

Given that both Bose and Nehru had a secular outlook, it is unlikely that social policy would have been radically different. In terms of governance structure, I think the lack of viable pan-India alternative to the Congress, facilitated the capture of the opposition space by regional/linguisitic forces. The map of modern India culd have looked very different if 2 national parties were present as alternatives for voters.

However, the Nehruvian takeover prevented anti-democratic tendencies from gaining ground on both the right and the left. As Pavan Verma explains in his superb book "Being Indian", democracy flourished in India initially paradoxically due to the anti-democratic ethos of the elites!- since they allowed it to take root with the hubristic notion that they would have access to power far more easily than the poor. A strong leftist alternative, would have scared the ruling classes into proactive measures to secure their fiefdoms, challenging democracy.

A stronger challenge would have probably arisen from the left in the form of Bose himself- unlike the Anglophile Nehru, it is unlikely that Bose had a deep philosophical commitment to democracy itself (after all he did seek to forge alliances with the Axis powers). A restless Bose might have mounted a direct challenge to the democratic structure, with a combination of revolutionary leftist politics and military muscle (with a band of loyal INA soldiers).

Like all counterfactual history- this is very speculative. However, it actually underlines how central Nehru was to the evolution of modern India- with just one viable alternative leader- the nature of the Indian state could have looked very different.

I was speaking to a my roommate and close friend of 8 years last night, when he was telling me about how when he is alone he likes to pretend that he is a baby and acts like he is crying!!!

As weird as that is, as I reflect, I find that i know some extraordinarily weird quirk of nearly every person that I am close to.

Here is my random theory- everyone is weird, but keeps it closely guarded. When we are truly close to someone, we feel comfortable in revealing our weird side to them.

The degree of closeness of the friendship is proportional to the extent to which we can exhibit our weirdness

As I was thinking of the last statement- I was contemplating if I should tweet or blog about this. Given the weirdness of my post itself- and that I have several mere acquaintances reading my tweets, while most readers of my blog are close friends, the choice was obvious!

Sunday, August 23, 2009

Two of my friends got married recently- one a Marwari and the other a South Indian Brahmin. Both are roughly of similar economic status- but the contrast between their weddings was striking- my Marwari friend had an ostentatious wedding with exorbitant ‘gifts’ from the bride’s family, while my other friend’s wedding was a much more simple affair, with no garish display of wealth or expectation of dowry of any kind.

As I thought about it, this seems fairly typical- most business families have ostentatious weddings and the practice of dowry is highly prevalent, while with most service-class families, the weddings are much more low key and dowry is practically non-existent.

To explain this I have a theory (as usual!). Ostentatious weddings are actually a low cost strategy! And dowry is in the interest of the woman!

Both of these phenomena can be explained as necessary evils in the absence of well-functioning organized sources of finance.

Consider the first question: Why do business communities have ostentatious weddings? On the face of it, it seems like an unnecessary expense- a large cost incurred with no obvious benefit- something which does not make ‘economic sense’

In economics, very often, if there is a significant cost incurred with no apparent direct benefit, the explanation is ‘signalling’

In a system, where organized sources of finance (like banks) did not exist, most finance for business was sourced from other members of the community. An ostentatious wedding is a low cost way for a businessman to signal his credit-worthiness (or more broadly to signal the overall reputation of his business). The purpose of signaling is to reach a ‘separating equilibrium’ (as in a strategy that cannot be copied easily and hence helps in distinguishing or separating the pretenders from the rest). Choosing a wedding as the means to achieve the separating equilibrium is actually lower cost for the truly credit worthy- since it is a one-time expense where several people of the community can be signaled to simultaneously

This incurring of a seemingly unnecessary cost to act as an ostentatious signal is also found in nature, most vividly with the showy peacocks. The vivid colors of a peacock are a ‘waste’ of genetic resources (which could have been ploughed more productively into more food or genetic material) and it also increases its risk of being spotted and hunted down by predators. But it is precisely that which makes it a powerful signal!- the peacock is signaling to its potential mate- that it is so superior genetically, that it can afford to waste genetic resources on ostentatious displays of beauty, which not only do not add to its survival chances (the peacock’s tail does not have any direct utility for survival), but actually reduces them (with the risk of being preyed upon). The right amount of signaling is of course one that maximizes the net benefit(too much signaling is costly and could lead to the death of the peacock by being hunted by predators , too little could lead to it not being able to attract a peahen which means it cannot pass on its genes)

A showy wedding is the human equivalent of a peacock’s tail.

Now to the second question- on why business families have a practice of dowry- my theory is that it was actually in the interest of the women!

It has been argued by several others- that dowry was actually an efficient means of wealth transfer to daughters. This makes sense, it would be better to transfer wealth to the daughter at the time of her wedding, when she is to leave her father’s house, rather than will it to her, since it would only cause disputes between her and her brothers, without the benefit of resolution by the father.

While this explains why dowry may have existed, it does not explain why it is much more prevalent in business as opposed to service-oriented families.

To that, my hypothesis is that dowry is a way to secure the future of the sub-unit (of the daughter and son-in-law) in the larger construct of the joint family.

To understand this, consider the trajectory of a typical family business’s expansion- a member of the family expands the business by opening ‘his’ unit (e.g. if the family runs jewelery shops, one of the sons would open a new shop- which he would operate)

Starting these units requires upfront capital investment, and it makes sense for money to be transferred at the time of the wedding, so that the son-in-law has enough money to strike out on his own, thus securing his stature and importance within the joint family.

Both of these social phenomena would not exist had there been access to organized sources of finance- credit worthiness would then be solved for by screening (as in the use of more sophisticated criteria by a bank to assess credit worthiness) rather than by signaling alone (Note: Signaling and screening are the 2 solutions to the classic problem of asymmetric information in economics)

Similarly, a businessman would have relied upon a bank, VC or PE fund for project finance for his new venture, and would not have required dowry as a source for the upfront capital investment.

I find this particularly interesting, since in my last project I came across several sub-optimal economic choices when access to finance was denied- its fascinating to see social evils also owe their origin to the same reason.

Thursday, July 16, 2009

She stood there next to the doorway on the tube, a stylish Gucci bag slung casually over her shoulder, her formal suit & briefcase indicating that she was employed in a high profile corporate job. “Must be an investment banker”, I mused; as she self-assuredly communicated succinct instructions to some underling on her sleek mobile phone. I watched her, fascinated, impressed by her confidence and poise.

As she spoke, she momentarily removed the cooling glasses obscuring her eyes. I was startled to see a visible ugly gash near her eye marring the otherwise flawless face. A purple wound- still capturing the violence with which she was struck-it was obvious that she had been brutally hit (“by an abusive boyfriend or husband?” I thought to myself). “How can a girl, so obviously accomplished and confident, allow herself to be subject to such callous brutality”, I thought. Her eyes wandered briefly in my direction, and she realized that I had noticed it.

Her face colored, as she felt exposed; her humiliation revealed to a total stranger, privy to her worst demons by nothing more than a passing glance. Her expression was a confused mixture of annoyance & defiance; annoyance at my inadvertent violation- as if by just realizing her predicament, I had transgressed some unspoken boundary between strangers; a facade of defiance- by pursing her lips; the show of emotional strength belied by the pain in her eyes.She melted, as she realized from my expression by own embarrassment. My silent empathy was wordlessly acknowledged by her, a shared experience of an intensely personal nature, amidst the chaos of a noisy train.

I was confused as to how to react. My hand half-outstretched, unsure whether to offer comfort; and confused if that presumptuous act would break the tenuous bond that we had built. Would I embarrass her by indiscreetly acknowledging the intimacy of our brief encounter? My confusion led inexorably to inaction, as I got down at the next station- the deep & ineffable interaction likely to leave a lasting impression despite its ephemeral nature.

The creaking doors shut slowly, our gazes locked with each other, as she evanesced along with the train, her eyes still mirroring her pain & gratitude.

Catastrophe strikes!: No tickets are available from Bhutan to India for next 2 weekends! Wll be stuck here indefinitely, wihtout being able to meet family for close to a month.

Depressed mood leads (as always) to Urdu poetry. Here are snippets of this poignant poem by Faiz Ahmed Faiz, soulfully rendered by Abida Parveen (I've included only the first and last verse which best describe my state of mind!)

Tuesday, July 7, 2009

Practically everyone thinks their mother is the best cook in the world. Let me assert that all of them are wrong, because my mother is clearly the best!

The distinctive feature of my mother’s cooking is her inventiveness. She can literally concoct new dishes with a dizzying array of ingredients across different cuisines. Succulent Indian vegetables & spices would add just the right amount of tanginess to a continental dish; a mélange of Mexican ingredients would find themselves in the midst of Indian roti-curry. And these disparate ingredients would all somehow come together to make culinary magic!

Truly good cooking then is not so much about knowing a wide array of recipes; it is really about knowing how ingredients work together. It is an art of being able to work with rules or ‘good moves’. This article (http://www.slate.com/id/2219243/pagenum/all) I read recently also talks about the same- master chefs are not storehouses of a zillion recipes, they are artists who can compose something new by creative application of heuristics that they pick up over the course of time. Cooking is hence, a pattern-recognition and not a data-crunching problem.

I remember reading an article about chess players that pointed to a similar thinking process. Grandmasters and professional chess players are expert pattern recognizers, not people with either elephantine memories or faster computational ability.

2-3 observations indicated this: Chess pros were no better than laymen or amateurs in rearranging chess pieces on a board that they were shown, if the pieces were randomly arranged (making it an ‘illegal’ position in chess). This showed that superior memory is not the cause for the difference in chess ability.

Similarly, self-reporting by chess pros showed that they had not evaluated more moves than amateurs before deciding their move. So it wasn’t even faster data crunching that explained the difference.

The true difference was in the pattern recognition- chess pros evaluated less ‘bad’ moves than amateurs. It is almost as if they had developed (or were born with) a filter that left out bad moves, just as amateurs would not evaluate illegal moves.

It is this knowledge of heuristics that distinguishes good chess players- they probably would be thinking stuff like “never sacrifice a pawn after castling if you’ve lost a knight”, “use a rook to check, with a knight threatening the opponent’s queen” and so on, just as a great cook must be thinking “Use cardamom with sautéed vegetables only if either tofu or mushroom is part of the salad” etc.

In fact, this would likely be the case with all art- it is the application of a wide range of ‘rules’ in varied permutations. We probably would not be able to identify all the rules, neither would a true artist be able to articulate them. But subconsciously, they are working with patterns, and therein lies their wizardry

My time in Bhutan has left me with time to blog once again. After a 2 year hiatus (after heroically managing to put up all of 4 posts), I hope to blog regularly this time.

In the tradition of ‘Freakonomics’, my latest musing is a wacky hypothesis on the reason for south Indian women being more socially empowered than those from the north.

Marxist methodology always seeks to explain social behavior and phenomena (the ‘superstructure’) in terms of underlying ownership of economic resources (the ‘base’)

With that thought- here’s the wacky hypothesis: South Indian women are more empowered since the South is (predominantly) rice growing, while the North is largely wheat growing.

The cultivation and harvesting of rice is something that women can (and do) participate in, since it requires deft work to remove the paddy from the fields, unlike wheat, whose harvesting requires heavy labor.

Women are thus part of the wealth-generating, productive employment in the south, which would lead to greater power and say even on social issues.

Secondly, the consumption of rice as compared to wheat also favors greater female empowerment.

Cooking rice has huge economies of scale (in terms of time invested) - cooking for 8-10 people (the typical size of a joint family) does not take much more effort than cooking for 2-3 people. It is possible for a woman to cook the rice and have her meal with the rest of the family

With wheat (as in roti, chapatti etc.) however, the cooking process does not have any economies of scale. Cooking 20 chapattis requires nearly 20 times the effort of cooking a single one. This coupled with the fact that Indians like to have their food hot, means that women have to spend their time slaving away cooking one roti after another for the family, and will end up having their own food only after everyone else is done.

The effect of this on a male child in the house too, is that he sees his mother as subservient to the male members of the family, hence retarding the rate of change & female empowerment

Bhutan itself is largely rice growing (over 60% of the population here grows rice). Unsurprisingly, women in Bhutan are highly empowered, owning most of the land & running most of the businesses. Even socially, they have an equal status with the men.

It will be interesting to see if women are noticeably more empowered in other rice-growing countries in the world (Vietnam, Philippines etc.)